By Jayson Forrest - Managing Editor - IMAP Perspectives

Dr Isaac Poole Global Chief Investment Officer - Oreana Portfolio Advisory Services
Dr Isaac Poole believes great governance is critically important for any financial planning business wanting to implement a managed accounts solution. He spoke recently about investment governance at an IMAP webinar on ‘Building an effective client solution through SMAs and MDAs’.
“Even before you begin thinking about how you are going to manage money, you’ve got to start thinking about what your governance frameworks are around managing that money. It’s the secret sauce for consistently and successfully delivering returns to your clients,” Isaac says.
“Globally, institutional managers and sovereign wealth funds have all invested heavily in developing effective governance frameworks for their businesses. They all know that the actual managing side of business can’t happen without a clear governance framework. It’s that critical.
“Individually, these large sovereign funds and asset owners spend millions of dollars annually on making incremental improvements to their governance frameworks, which they believe will help them to continue to deliver good returns for their clients.”
Isaac believes the Australian financial services industry can learn a great deal from these global wealth managers in terms of their approach to governance, including how they implement governance frameworks and why they do it.
Investment governance and investment expertise are complementary and they need to work together, in order to achieve a coherent and clear investment objective… Without getting these two key areas working together, you’re not going to be able to achieve the best investment outcomes for your clients.”
A growing focus on governance
In his role as Global Chief Investment Officer at Oreana, Isaac has a fairly simple view of what investment governance is. For him and the team at Oreana, governance is the effective use of all the resources available to a business to fulfil its fiduciary duty and achieve the underlying investment objectives for its clients.
“You need to use all the resources at your disposal, which include the people you have working with you and the policies you have in place. It’s about having processes to implement those policies, while using the technology and systems available to run that governance framework,” he says. “Governance is critically important because it focuses on achieving investment objectives.”
To understand today’s focus on governance, you need to go back to the 1990s, when the Association for Investment Management and Research conducted research that examined what was preventing some of the largest global pension managers (primarily in the U.S.) from achieving good investment performance for their clients.
The research - ‘Improving Pension Fund Performance, 1998’ - found that many of the findings were directly linked to governance issues. These included:
- 98 per cent of respondents said that not having the right processes in place were barriers to better investment performance.
- 48 per cent said that inadequate resources were barriers to better investment performance.
- 35 per cent said issues with people, like staff having insufficient skills, were barriers to better performance.
- 43 per cent said that having an unclear mission and not having the right policies in place were preventing them from getting better returns for their clients.
“As a result of these findings, it was around this time in the last 1990s that institutional managers really started to think deeply about the importance of governance. And from that point onwards, we started to see more academic and industry research into investment performance, with regulators beginning to increase their focus on governance, which has increasingly become a significant issue for the industry,” says Isaac
Good governance and good governance frameworks empirically and provably drive long-term returns for clients.”
Governance is not expertise
When it comes to investment governance, Isaac says it’s important to note that it is not the same as investment expertise.
“Investment governance and investment expertise are complementary and they need to work together, in order to achieve a coherent and clear investment objective,” he says. “However, you first need to get the investment governance right, before working out your investment management expertise. Without getting these two key areas working together, you’re not going to be able to achieve the best investment outcomes for your clients.”
When it comes to setting out governance frameworks, Oreana thinks about governance as a series of three levels. Each level needs to be done right, as part of implementing an effective framework. These three levels comprise of the following:
Level 1: Oversight body
The oversight body focuses on:
- Meeting longer term stakeholder outcomes.
- Overseeing the roles and responsibilities across the investment process.
- Approving policies, setting the risk appetite and appointing key stakeholders.
“We think that good governance involves a broad oversight body, which has a critical role in overseeing and providing clarity around the roles and responsibilities of the resources that are available at a business’s disposal,” Isaac says. “The oversight body is responsible for focusing on the bigger picture and long-term issues, and looks at ways it can improve the governance framework to achieve better outcomes for clients.”
Level 2: Investment committee
The investment committee is responsible for:
- Providing policy advice to the oversight body, and preferably including an independent member as part of the committee.
- Deciding how to allocate and invest assets, while monitoring fund manager and investment performance.
“Businesses are keen to show they have an experienced investment committee, which is assisting the business by reviewing the management of its portfolios.”
Level 3: Portfolio management
Portfolio management comprises:
- The management and implementation of the portfolio on a day-to-day basis.
- Meeting the investment objective.
“This third layer is the actual implementation and management of the funds themselves. Businesses invest a lot of money, time and resources into this third layer, which involves the actual management of the money itself,” Isaac says. “However, in doing so, the first two layers have been somewhat left behind and tend not to receive the same level of focus.
“So, when we look at governance frameworks, by also focusing on the first two levels, we believe that’s where a business can make big gains quickly in strengthening its governance framework and subsequently, deliver better outcomes for clients.”
Governance is more than just an investment committee, it’s more than just having some investment beliefs jotted down on a document or on your website. Instead, it’s about living and breathing these beliefs.
Why is investment governance important?
Billions of dollars are invested annually by large institutions globally on improving their governance frameworks. But why are they investing so much in governance and why is it so critical for them?
“They’re good questions,” says Isaac. “The simply answer is, good governance and good governance frameworks empirically and provably drive long-term returns for clients. In other words, good governance and good governance frameworks add value for clients in terms of investment returns, while poor governance destroys value in terms of investment returns over the long-term.”
Isaac points to industry research that shows that, as a result of good governance frameworks, the incremental returns can be as high as 100-300bps per year over the long-term. He says this is a significant return on the investment of implementing a governance framework.
“That means if you are an investment fiduciary, you absolutely have an obligation to invest and think about governance frameworks and review them annually. You really need to work on developing and implementing a clear best practice framework for your business,” he says.
“Best governance frameworks, or best practice stewardship, are going to deliver better outcomes for clients. These frameworks are going to be a way of improving the wealth profession from a best interests perspective.”
Isaac adds that regardless of whether a business uses an SMA, MDA or bespoke models, a governance framework sits at the very heart of everything an advice business does. That means for businesses that choose to focus on governance and best practice stewardship, they will have clear documented policies, with repeatable and consistent processes, that are implemented by experienced individuals.
“By bringing all these pieces together under a governance framework, they will help provide better outcomes that are in your client’s best interests,” Isaac says. “Governance is more than just an investment committee, it’s more than just having some investment beliefs jotted down on a document or on your website. Instead, it’s about living and breathing these beliefs.
“Therefore, good governance is critically important for any financial planning business, including those businesses implementing a managed accounts solution.”
About Dr Isaac Poole
Dr Isaac Poole is Global Chief Investment Officer at Oreana Portfolio Advisory Services. Dr Poole spoke on governance as part of an IMAP webinar series on ‘Building an effective client solution through SMAs and MDAs’.